New Variations to Bond Linked Note │ GH Product Idea

Innovative Variations to Bond Linked Note

✦ US July nonfarm payrolls rose by 73,000, far below the forecast of 104,000. May and June revisions cut 258,000 jobs, signaling a cooling labor market and sparking market concerns. The latest inflation print boosted expectations for a Sep rate cut and traders are now anticipating more rate reductions than previously forecasted.

✦ J.P. Morgan Research has significantly revised its outlook for Federal Reserve policy, bringing forward expectations for interest rate cuts. It now anticipates four consecutive 25 basis point cuts, beginning next month and continuing over subsequent meetings. This change reflects rising concerns over labor market softness highlighted by the weak July employment report. As a result, they now project the trough for the 10-year yield to reach 4.15% – a significant drop from prior forecast of 4.25%. With easing concentrated over the coming months, yields are poised to fall materially.

✦ For yield-focused investors, the key implication is resounding: seize today’s higher yields before the anticipated decline. With the Fed expected to embark on 100 basis points of cuts over the next year starting potentially as early as next month, current yield levels offer a compelling window of opportunity.

✦ RCN linked to US Treasury with fixed coupon (commonly referred to as Bond Linked Notes in market terminology) has maintained consistent popularity in the market for an extended period, serving as a core structured solution in the fixed income space. We now recommend considering innovative variations to enhance yield potential – specifically, RCNs on US Treasury featuring Range Accrual or Digital Coupon structures. These variations provide substantive yield improvements compared to standard UST RCNs, creating more compelling value propositions in the current interest rate environment.

Range Accrual RCN on UST

✪ The product features a conditional accrual structure rather than a guaranteed fixed coupon. Interest accumulates when range accrual condition is met and is distributed one off at maturity.

✪ At maturity, the redemption method is determined by strike level. If final underlying price is below strike, physical delivery of the underlying asset (US Treasury) will occur.

✪ For reference, the yield pick-up versus regular RCN with fixed coupon is at around 50bps.

Issuer │ Nomura
Product Type │ Yield Enhancement
Tenor │ 12M
Settlement Cycle │ T+14 calendar days
Currency │ USD
Underlying │ CT30 (US912810UM89)
Strike Yield │ 4.90% (97.86% Strike Price)
Range Accrual Condition │ USD 10Y SOFR CMS ≤4.50%
Coupon │ 8.20% x n/N* p.a.
n = number of days underlying is within range
N = total number of days
Coupon Frequency │ Annually
Final Payoff │ If Underlying Final Price >= Strike, 100% of principal. Else, physical delivery of the Underlying at Strike
Reoffer │ 99%

Digital Coupon RCN on UST

✪ The product features a digital coupon structure rather than a guaranteed fixed coupon. Interest is paid one off at maturity if the condition is met.

✪ At maturity, the redemption method is determined by strike level. If final underlying price is below strike, physical delivery of the underlying asset (US Treasury) will occur.

Issuer │ Nomura
Product Type │ Yield Enhancement
Tenor │ 6M / 12M
Settlement Cycle │ T+14 calendar days
Currency │ USD
Underlying │ CT30 (US912810UM89)
Strike Yield │ 4.90% (97.86% Strike Price for 12M and 97.83% for 6M)
Coupon Condition │ USD 10Y SOFR CMS ≤4.50%
Coupon │ 8.60% / 8.80% Flat
Coupon Frequency │ One off at maturity
Final Payoff │ If Underlying Final Price >= Strike, 100% of principal. Else, physical delivery of the Underlying at Strike
Reoffer │ 99%

Terms are indicative only, subject to the confirmed level on the trade date

Key Risks: The product is not principal protected and its mark-to-market is subject to market volatility and issuer credit risk. In the worst-case scenario, investors may experience a total loss of capital in the event of issuer’s default.

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[AI Translation of Market Comments]

美国7月非农就业人数增加7.3万，远低于预期的10.4万。 5月和6月的数据下修共减少了25.8万个职位，表明劳动力市场正在降温，引发了市场担忧。最新的通胀数据增强了对9月降息的预期，交易员目前预计的降息次数将超过此前预测。
摩根大通研究部门已显著修正其对美联储政策的预期，提前了对利率下调的预测。现在预计将有四次连续的25个基点降息，从下月开始并在随后的会议中持续。这一变化反映了对劳动力市场疲软的日益担忧，特别是7月就业报告疲弱更加凸显了这一点。因此，他们现在预测10年期国债收益率的最低点将达到4.15%——较此前4.25%的预测有显著下降。随着宽松政策集中在未来几个月内实施，收益率有望大幅下跌。
对于专注于收益率的投资者而言，关键启示非常明确：应抓住当前较高的收益率水平，赶在预期下降之前。预计美联储将从下个月开始在未来一年内进行总计100基点的降息，当前的收益率水平提供了一个诱人的机遇窗口。
与美国国债挂钩的固定票息票据（市场上通常称为债券挂钩票据）长期以来一直在市场上保持持续的受欢迎程度。我们现在建议考虑创新变体以提升收益潜力——特别是采用区间计息或紅利票息结构的票据。这些变体相比标准的固定票息票据提供了实质性的收益率提升，在当前利率环境下创造了更具吸引力的价值主张。